Question 1

Explain how a deferred tax liability arises from depreciation of machinery and equipment.

Accepted Answer

From a taxation perspective specific dep

Question 2

Discuss the assumptions made when recognising a deferred tax asset or a deferred tax liability.

Accepted Answer

When recognising a deferred tax asset or

Question 3

Raging Dragons Ltd has a depreciable asset that is estimated for accounting purposes to have a useful life of 15 years.For taxation purposes the useful life is 10 years.The asset was purchased at the beginning of year 1,there is no residual value,and the straight-line method of depreciation is used for both tax and accounting purposes.The tax rate is 30% and the cost of the asset is $150 000.What adjustment will be required to the deferred tax liability account in years 10 and 11?

Accepted Answer

A)  End of year 10 $1500; year 11 $1500 
B)  End of year 10 $5000; year 11 $(10 000) 
C)  End of year 10 $1500; year 11 $(3000) 
D)  End of year 10 $15 000; year 11 $(3000) 
A)  End of year 10 $1500; year 11 $1500 
B)  End of year 10 $5000; year 11 $(10 000) 
C)  End of year 10 $1500; year 11 $(3000) 
D)  End of year 10 $15 000; year 11 $(3000)

Question 4

The tax base of revenue received in advance is equal to zero where the revenue received is taxed in the reporting period that the revenue is received.

Accepted Answer

A) True 
 B)False

Question 5

The balance sheet approach compares the carrying value with the tax base of the assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 6

As at 30 June 2012,the Provision for Long-service leave balance was $125 000.During 2011/12 $54 000 was charged to the provision account,and leave to the value of $34 000 was taken by staff.The balance on 30 June 2013 was $135 000,following the charging of long-service leave expense of the same amount as in 2011/12 ,i.e.$54 000.Assuming there were no other temporary differences,what is the journal entry to adjust for the changes in these balances as at 30 June 2013? The corporate tax rate is 30%.

Accepted Answer

A) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 3000 & \
\hline \mathrm { Cr } & \text { Income taxation expense } & & \$ 3000 \
\hline
\end{array}
\end{array}$$ 
B) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income taxation expense } & \$ 44000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 44000 \
\hline
\end{array}
\end{array}$$ 
C) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income taxation expense } & \$ 44000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 44000 \
\hline
\end{array}
\end{array}$$ 
D) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income taxation expense } & \$ 13200 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 13200 \
\hline
\end{array}
\end{array}$$ 
A) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 3000 & \
\hline \mathrm { Cr } & \text { Income taxation expense } & & \$ 3000 \
\hline
\end{array}
\end{array}$$ 
B) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income taxation expense } & \$ 44000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 44000 \
\hline
\end{array}
\end{array}$$ 
C) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income taxation expense } & \$ 44000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 44000 \
\hline
\end{array}
\end{array}$$ 
D) 
$$\begin{array}{l}
30 \text { June } 2013\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income taxation expense } & \$ 13200 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 13200 \
\hline
\end{array}
\end{array}$$

Question 7

Discuss the conditions that must be met to allow the set-off of current assets and current tax liabilities.

Accepted Answer

The set-off of current assets and curren

Question 8

Some items are treated as a deduction for tax purposes when they are paid but are recognised as expenses when they are accrued for accounting purposes.Which of the following items are of that type?

Accepted Answer

A)  long-service leave 
B)  goodwill amortisation 
C)  depreciation 
D)  entertainment 
A)  long-service leave 
B)  goodwill amortisation 
C)  depreciation 
D)  entertainment

Question 9

The AASB 112 approach has been adopted because:

Accepted Answer

A)  it matches the revenues earned with tax payable on those revenues. 
B)  it is conservative. 
C)  it is considered consistent with the AASB Conceptual Framework. 
D)  it is considered acceptable by the ATO. 
A)  it matches the revenues earned with tax payable on those revenues. 
B)  it is conservative. 
C)  it is considered consistent with the AASB Conceptual Framework. 
D)  it is considered acceptable by the ATO.

Question 10

On 1 January 2012,William Bay Ltd purchased a machine for $100 000.The entity adopts a straight-line depreciation method and uses 10% and 15% as depreciation rate and tax rate respectively.The salvage value is zero and the tax rate is 30%. At 31 December 2012,which of the journal entries is correct with respect to the transaction that is in accordance with AASB 112 Income Taxes only?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 5000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 5000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 5000 & \
\hline \mathrm { Cr } & \text { Income tax expense } & & \$ 5000 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 1500 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Income tax payable } & & \$ 1500 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 5000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 5000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 5000 & \
\hline \mathrm { Cr } & \text { Income tax expense } & & \$ 5000 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 1500 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Income tax payable } & & \$ 1500 \
\hline
\end{array}$$

Question 11

AASB 112 uses what term to describe the method for accounting for taxes that it mandates?

Accepted Answer

A)  net balances method 
B)  financial position method 
C)  asset and liability method 
D)  balance sheet method 
A)  net balances method 
B)  financial position method 
C)  asset and liability method 
D)  balance sheet method

Question 12

The criterion for recognising a deferred tax asset is that:

Accepted Answer

A)  it should be fully recognised if it is probable that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
B)  it should be recognised if it is possible that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
C)  it should be recognised to the extent, and only to the extent, that it is possible that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
D)  it should be recognised to the extent, and only to the extent, that it is probable that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
A)  it should be fully recognised if it is probable that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
B)  it should be recognised if it is possible that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
C)  it should be recognised to the extent, and only to the extent, that it is possible that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised. 
D)  it should be recognised to the extent, and only to the extent, that it is probable that future taxable amounts within the entity will be available against which the deductible temporary differences can be utilised.

Question 13

There are two types of temporary differences between the carrying value of assets and liabilities and the tax base-assessable temporary differences and neutral temporary differences.

Accepted Answer

A) True 
 B)False

Question 14

The reversal of deductible temporary differences results in deductions in determining the:

Accepted Answer

A)  income tax expense 
B)  future taxable profits 
C)  carrying amounts 
D)  income tax payable 
A)  income tax expense 
B)  future taxable profits 
C)  carrying amounts 
D)  income tax payable

Question 15

The difference between the carrying amount of an asset or liability in the balance sheet and its tax base is a temporary difference.

Accepted Answer

A) True 
 B)False

Question 16

A taxable temporary difference is one that will result in:

Accepted Answer

A)  an increase in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
B)  a decrease in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
C)  an increase in income tax recoverable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
D)  a decrease in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled and an increase in income tax recoverable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
A)  an increase in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
B)  a decrease in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
C)  an increase in income tax recoverable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. 
D)  a decrease in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled and an increase in income tax recoverable in future reporting periods when the carrying amount of the asset or liability is recovered or settled.

Question 17

If a tax rate change from 30% to 25% results in an adjustment to the deferred tax liability account of $50 000,what is (a)the amount of the temporary differences and (b)the type of temporary differences?

Accepted Answer

A)  (a) $ 1 000 000; (b) taxable temporary differences 
B)  (a) $ 1 000 000; (b) deductible temporary differences 
C)  (a) $ 50 000; (b) taxable temporary differences 
D)  (a) $ 50 000; (b) deductible temporary differences 
A)  (a) $ 1 000 000; (b) taxable temporary differences 
B)  (a) $ 1 000 000; (b) deductible temporary differences 
C)  (a) $ 50 000; (b) taxable temporary differences 
D)  (a) $ 50 000; (b) deductible temporary differences

Question 18

Discuss how the carrying amounts of deferred tax assets and liabilities may change even though there are no changes in the amount of the underlying temporary differences.

Accepted Answer

The carrying amounts of deferred tax ass

Question 19

Casper Ltd incurred a loss of $500 000 for tax purposes in 2014.This was due to one-off circumstances and it is expected that Casper will make profits again in 2015 and subsequent years.There are no temporary differences in either year.In 2015 Casper makes a profit of $700 000.The tax rate is 30%.What are the journal entries for 2014 and 2015?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 20

Criteria used by an entity to assess the probability that taxable profit will be available against which unused tax losses can be utilised include:

Accepted Answer

A)  whether the unused tax losses result from identifiable causes that are unlikely to recur. 
B)  whether it is probable that the entity will have taxable profits before the unused tax losses expire. 
C)  whether permission has been received from the Australian Taxation Office to carry forward tax losses. 
D)  whether the entity has unused tax losses relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses can be utilised before they expire. 
A)  whether the unused tax losses result from identifiable causes that are unlikely to recur. 
B)  whether it is probable that the entity will have taxable profits before the unused tax losses expire. 
C)  whether permission has been received from the Australian Taxation Office to carry forward tax losses. 
D)  whether the entity has unused tax losses relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses can be utilised before they expire.

Exam 18: Accounting for Income Taxes

Explain how a deferred tax liability arises from depreciation of machinery and equipment.

Discuss the assumptions made when recognising a deferred tax asset or a deferred tax liability.

The tax base of revenue received in advance is equal to zero where the revenue received is taxed in the reporting period that the revenue is received.

The balance sheet approach compares the carrying value with the tax base of the assets and liabilities.

Discuss the conditions that must be met to allow the set-off of current assets and current tax liabilities.

Some items are treated as a deduction for tax purposes when they are paid but are recognised as expenses when they are accrued for accounting purposes.Which of the following items are of that type?

The AASB 112 approach has been adopted because:

AASB 112 uses what term to describe the method for accounting for taxes that it mandates?

The criterion for recognising a deferred tax asset is that:

There are two types of temporary differences between the carrying value of assets and liabilities and the tax base-assessable temporary differences and neutral temporary differences.

The reversal of deductible temporary differences results in deductions in determining the:

The difference between the carrying amount of an asset or liability in the balance sheet and its tax base is a temporary difference.

A taxable temporary difference is one that will result in:

If a tax rate change from 30% to 25% results in an adjustment to the deferred tax liability account of $50 000,what is (a)the amount of the temporary differences and (b)the type of temporary differences?

Discuss how the carrying amounts of deferred tax assets and liabilities may change even though there are no changes in the amount of the underlying temporary differences.

Criteria used by an entity to assess the probability that taxable profit will be available against which unused tax losses can be utilised include:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Accounting

An Overview of Accounting for Assets

Depreciation of Property, plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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